Electric Utilities

In trading on Monday, metals & mining shares were relative laggards, down on the day by about 2%. Helping drag down the group were shares of Molycorp (MCP), off about 13.6% and shares of Arch Coal (ACI) down about 5.3% on the day.

The Environmental Protection Agency said on Tuesday that it may ease an interim deadline for states to meet tougher carbon emission standards after regulators and electric utilities complained a lack of time may destabilize electricity supplies.

A new University of California, Berkeley study shows that if biomass electricity production is combined with carbon capture and sequestration in the western U.S., power generators could actually store more carbon than they emit.

In trading on Friday, precious metals shares were relative laggards, down on the day by about 3.8%. Helping drag down the group were shares of Agnico Eagle Mines (AEM), down about 8.4% and shares of Richmont Mines (RIC) off about 8.1% on the day.

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The electric utility industry is mammoth in size. In 2009, the U.S. electricity industry supplied 4.0 million gigawatt hours (GWh), of which 70.2% was from combustible fuels.[1] The International Energy Agency predicts that electricity demand will double over the next 25 years. Not only will that require a lot of electricity generation from nuclear and coal, but it will also require a significant investment in the transmission lines, substations, meters, and other equipment and services that bring electricity into the homes and businesses that depend on it. The transmission and distribution of electricity is the core business of electric utilities.

The electricity industry value chain consists of four elements. First, there is energy generation, requiring both a fuel source (e.g., coal, nuclear, natural gas, Wind Energy) and a power plant to convert that fuel source into electricity. Second, electricity transmission involves both transforming generated electricity into electricity that can be transmitted over power lines and matching end user requirements (demand) with energy availability (supply). After transmission, electricity must be distributed to individual end users via a vast network of power lines and substations. Electric utilities often own miles of power and transmission lines-- PG&E, the nation's 2nd largest utility, owns over 100,000 miles of distribution lines alone. Lastly, there is delivery, where electricity is transformed again and delivered directly to an end user. Delivery also involves metering and billing.

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Overview of the electricity value chain, from the Energy Storage Council

Understanding the business of electric utilities requires understanding which parts of the value chain they control-- and which parts they don't. As indicated by the explanation above, electricity is a natural monopoly--there is typically only one power line connected to your house. While one company may own that power line, they do not have a lot of say in the prices they charge due to government regulations.If prices went up would you switch utility companies? That would be difficult to impossible, depending on where you live.

Trends and Forces Affecting Electric Utilities

In the fourth quarter of 2008, the U.S. economy contracted at a 3.8% annualized rate (5.1%, excluding inventory buildup) according to the U.S. Bureau of Economic Analysis.[2] When the economy is in a recession and output contracts, demand for electricity plummets, as large industrial users cut back on production. As demand for electricity falls, so too do prices. This, combined with shrinking credit markets, means that electric utilities will find it difficult to spend more on investment, which has the potential to be a problem for companies operating in states with Renewable Portfolio standards (see below).

The 2008 Financial Crisis also saw plummeting commodities prices. The price of coal, in particular, is important to electric utilities; in April 2008, coking coal prices went as high as $285 per metric ton.[3] According to a report by UBS analysts, however, 2009 coking coal prices will drop to $85 per metric tonne and thermal coal will sell on average for $55 per short ton (.91 metric ton).[4] Similarly, natural gas contracts fell from a high over $14 in early July 2008 to below $4.50 in late January 2009.[5] As the costs of energy inputs decline, electric utilities will see their costs decline; the only question is: will costs or prices decline faster?

For the first time since 1945, the end of the Second World War, the International Energy Agency has forecasted that world electricity demand will fall 3.5% as a result of the global recession.[6] Chinese electricity use is predicted to fall 2% from 2008, while Russia's by 10%, and the OECD's by 5%.[7] Of these declines, three fourths are attributed to reductions in industrial energy consumption - because of the fall in industrial output.[8] To compare with these numbers, global energy demand increased 2.5% during 2008, the year the crisis struck.[9]

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Regulations continue to affect coal dependent power generators

Utilities face growing pressure from government regulatory bodies to curb their emissions of greenhouse gases, making them particularly vulnerable to "green" legislation like the Renewable Portfolio Standards being enacted in 26 states and the Advanced Energy Portfolio Standard being enacted in Ohio. Legislation such as these continue to pressure utilities using coal to switch to cleaner forms of energy generation.

Also effecting utilitiy companies, in July 2010, the Obama administration proposed deadlines to curb pollution. The proposed rules would limit trading of pollution allowances while slashing sulfur dioxide, which produces acid rain, and nitrogen oxide, the cause of smog. The proposed rules would cut sulfur dioxide by 71 percent by 2014 from 2005 levels and nitrogen oxide by 52 percent over the same period. Leading utility companies have made statements that utilities do not have enough time to permit, construct and install control equipment to limit emissions or replace polluting plants with new capacity.[10] Pollution cutting legislation will continue to impact utilities and will require changes to traditional forms of power generation.

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Weather

Like air conditioner manufacturers, electric utilities have a love/hate relationship with the weather. Higher temperatures in the summer mean higher electricity bills (the average monthly residential bill in the U.S. is $88.60), but can also force the utility to purchase power at more expensive prices or to fire up older, less efficient power plants. Since retail prices are typically regulated, the high costs of generating electricity during peak usage periods cannot be passed on to customers.

Electricity Demand

U.S. households consume 21% more electricity now than they did in 1978, and the Edison Electric Institute estimates U.S. electricity use to rise by 30% by 2030 and U.S. household use to increase by 11%. At the same time, committed resources are only predicted to rise by 8.5%.[11] Combine this with growing demand from growing computer and AC use and restriction on generating sources to address climate change and some are predicting that the next price shock will be in the form of spiking electricity prices. Since 2000, average U.S. electricity rates have increased at 2.5% per year - faster than the 2% rate of inflation.[12]

Decreasing global demand for electricity, as predicted for 2009[13], will likely have the effect of lowering electricity rates, as local regulatory agencies will be pressured to reduce prices in the effort to take some strain off consumers.

Despite the long-term trend towards increasing energy use, the U.S. has become far more energy efficient over time. In 1970, the U.S. economy needed 18,000 BTUs for every dollar of GDP; as of 2008, only 8,520 BTUs are needed to generate a dollar of national income.[14] Thus, economic growth has been the primary driver of energy consumption - per dollar, Americans are actually using less energy than before, the implications of which mean that energy consumption actually grows at a lower rate than the economy - bad news for electric utilities.

The Grid is Aging

Much of the nation's electricity infrastructure is over 100 years old; as electrical demand increases, utilities companies are being forced to look into installing new, costly infrastructure to handle more power - to be exact, an estimated $17 billion in new infrastructure technology by 2010, which will use techniques like liquid nitrogen cooling.[15] Some utilities, like Xcel Energy and Dominion Resources, are installing "Smart Grid" systems to help customers monitor electricity use and manage loads and costs.

Modernization of the U.S. Electrical Grid is Needed to Ensure Full Potential of Wind Energy

As interest in renewable energies has increased, focus has turned to the ability of the nation's electricity grid to handle this energy and in a more efficient manner. With the passing of the American Economic Recovery and Assessment Act $4.5 billion dollars was allotted to the Office of Electricity Delivery and Energy Reliability to be used to modernize the electric grid, enhance security of the energy infrastructure and to ensure that growing demand is met.[16] However, this is a small amount of what is required to upgrade grids and interconnects. It has been reported that to support the transportation of the proposed 300,000 MW of wind energy will require the investment of $60 billion by 2030.[17]

The current grid is over 100 years old and consists of over 9,200 electric generating units with more than 1,000,000 megawatts of generating capacity and more than 300,000 miles of transmission lines. Integrating large amounts of wind or solar power into the grid will require advanced energy management techniques and approaches at the grid operator level. According to the European Wind Energy Association for these energies to supply more than 20%, vast improvements will be required. If these are not met and planned for, the full potential of wind and solar power will not be realized. This is crucial considering that 29 states have committed to the use of renewable energy sources, with goals of increasing energy portfolios by up to 20% by as early as 2010.[18]

Also for the second year in a row a poll conducted by NRG Systems at the American Wind Energy Association's (AWEA) WindPower 2009 conference found that transmission and interconnection constraints were the greatest barrier to the development of wind energy. 43% of respondents (making it the leading opinion) stated that an upgraded national transmission system would contribute the most to the development of wind energy.[19] Without improvements the ancient electric grid of the U.S. will continue to struggle to meet increasing demand and the ability to incorporate input from renewable resources. Work must not only focus on the generation of wind energy, but to ensure that it can be distributed and utilized to its full potential.